The majority of cryptocurrencies today use the blockchain network as a technological foundation to enable transactions. Then, the transaction is verified using a system called a consensus mechanism. The two most popular consensus mechanisms are proof-of-work (PoW) and proof-of-stake (PoS). The PoW that the Bitcoin blockchain uses is designed to put the security of asset transfers as its main priority. With the rise of cryptocurrencies, the PoS system was created, and it quickly became the preferred consensus mechanism because it is more environmentally friendly and uses less energy than PoW. So, what a Proof-of-stake is? Why more and more blockchains are using the system? This article will explain the PoS mechanism in detail.
Article Summary
- ️ 🖥️ Proof-of-stake (PoS) is an algorithm mechanism for reaching consensus in order to finalize transactions. PoS requires users to stake a certain amount of their tokens to get a chance to participate in validating transactions.
- 🍀 The PoS system makes every blockchain more environmentally friendly and allows the staking process for users to earn passive income.
- 🌐 Cryptocurrencies with a PoS system can process transactions very fast at a low cost. It also solves the scalability problem for platforms looking to create a decentralized application ecosystem.
Proof-of-Stake (PoS) Definition
Proof-of-stake (PoS) is an algorithm mechanism for reaching consensus in order to finalize transactions. PoS requires users to stake a certain amount of their tokens to get a chance to participate in validating transactions and earn rewards. In short, this algorithm relies on the number of tokens the user stake in the system and selects validators for transactions based on that.
💡 In the crypto world, the term Stake refers to the cryptocurrency the user owns and stores in the system to participate in the verification and validation of transactions.
This complex mechanism is carried out to achieve distributed consensus, a condition in which the system runs safely and decentralized because transaction verification is carried out by other users. In a PoS system, there are no miners competing to use their computer power to process transactions and earn rewards.
Also read: What is blockchain and how does it work?
The block creation process in a PoS mechanism is carried out through random selection in a measured way so that it does not consume high electrical energy. In addition, in a PoS system, anyone can become a transaction validator as long as they have a certain number of tokens as a stake.
How does PoS work
The Proof-of-stake system does not rely on the mining process in the creation of new blocks so it is not referred to as ‘mined’ but rather ‘printed’ or ‘forged’. Instead of mining new blocks by doing computational work, the system requires users to show ownership of a certain number of tokens.
💡 The proof-of-stake system was first introduced in a paper written by Sunny King and Scott Nadal in 2012. This system was created to solve the high energy consumption of Bitcoin mining.
In a proof-of-stake system, miners are referred to as ‘validators’ who will stake their tokens to participate in transaction verification. The tokens staked in the system will be kept as collateral as long as the user is still a validator. When a validator is selected, its role is to verify the validity of transactions within the block, sign them, and register the new block into the network for validation.
PoS Algorithm chooses validators randomly but those with higher stakes are prioritized. The higher the crypto asset staked, the higher the chance of being selected as a validator. However, the algorithm will still randomize the selection of validators so that those with the highest stake are not always selected to avoid the system being too predictable.
💡 The two most popular validator selection methods are Randomised block selection, where validators are selected by searching users with the lowest combination of hash value and highest stake. The Coin Age Selection selects validators based on how long their tokens have been staked.
One of the things that make PoS different from PoW systems is the rewards given to transaction validators. Most blockchains with PoS have created their entire supply of tokens in the first place. Therefore, rewards are given in the form of transaction fees, not new coins such as Bitcoin. However, there are still some exceptions where validators are rewarded new coins for staking.
So, validators are rewarded when they validate transactions and create new blocks. If the validator fails to do this job, the number of tokens he staked will be deducted or ‘slashed’ and banned from becoming a validator for a certain time.
Delegated Proof-of-Stake (DPoS)
Users who wish to participate in the verification process but cannot become a validator can choose to become a ‘delegator’. Delegators are ordinary users who stake by entrusting their crypto assets to validators. This delegation system is used in Delegated proof-of-stake which is an improvement of the traditional PoS method.
💡 You can participate in staking by depositing your assets for a determined amount of time and getting a fairly large passive income between 3-25%.
What is the difference between Proof-of-Stake and Proof-of-Work?
As already explained, proof-of-work and proof-of-stake systems are very different. However, fundamentally, both have the same goal of creating a secure decentralized system without the use of third parties. In addition, PoW and PoS capabilities are very different especially in the context of scalability and dealing with network congestion.
Also read: What is Ethereum and how do smart-contracts work?
Ethereum, one of the first smart-contract platforms, uses proof-of-work and often had problems with scalability because of very high transaction fees. This happens because the transaction verification method in a PoW is very complex and requires considerable computing power. This problem does not occur in blockchain with PoS systems because the verification method is easy to perform and cost almost close to nothing.
However, on September 15, 2022, Ethereum successfully completed the network transition from proof-of-work to proof-of-stake. This network transition is called The Merge.
Read more about What Happened To Ethereum After The Merge?
PoS vs. PoW
| Aspects | Proof-of-Stake | Proof-of-Work |
|---|---|---|
| ⚡ Energy Consumption | Low | High |
| 🛡️ Security | Untested as it is relatively new | Secure and tested |
| 🔧 Decentralization and Centralization | More decentralized as the number of validators is not limited | More centralized because of Bitcoin mining company. |
| 👤 User Staking | Yes | No |
| ⛏️ Requirements for validators/miners | A predetermined amount of token | Mining computer and large electrical capability |
| ⚙️ Scalability | High because methods for verification is simple | Low because transaction verification is costly and complex |
Advantages of PoS over PoW
- 🍀 Environmentally friendly: PoS systems consume much less electricity and are more environmentally friendly than PoW systems.
- 🏎️ Transaction speed and fees: A simple and easy PoS verification method can facilitate a fast blockchain network without expensive transaction fees.
- 💸 Users can do staking: Blockchain with a PoS system can involve users to do staking in order to get passive income.
- 👨💻 Scalability for app developers: Crypto app developers will choose to build their apps on blockchain with a PoS system so that their users don’t have to pay expensive transaction fees.
Several coins using Proof-of-stake (PoS)
Solana (SOL)
Solana is a cryptocurrency that combines proof-of-stake with Solana’s proof-of-history algorithm. Proof-of-history adds a timestamp to all transaction validation processes. These two verification systems work complementary to each order to create a blockchain that can process transactions quickly with low transaction fees.
In addition, Solana also made other innovations on top of the two verification systems, such as adding a gulf stream protocol at the PoS level to reduce the duration of transaction validation. Currently, Solana is one of the fastest blockchains with an application ecosystem that can rival Ethereum.
Cardano (ADA)
Cardano is a cryptocurrency that utilizes a modified proof-of-stake method called the Ouroboros system. The Ouroboros system is a PoS modification that adds a time division to separate the validator selection process. This time division is referred to as an epoch which is divided into several slots. Each slot has a slot leader who acts as a lead validator for a certain amount of time.
Cardano’s proof-of-stake system has been modified so that each validator plays a role in validating transactions for a set time (1 Epoch usually last one or several days). This selection is done randomly and alternately so that the validator of each epoch will continue to change.
Fantom (FTM)
Fantom is a crypto asset that utilizes the proof-of-stake method modified by Fantom. This modification is a leaderless proof-of-stake known as Lachesis. Lachesis uses a directed acyclic graph (DAG) which manages the transaction sequence for each validator. Lachesis ensures each validator can verify and finalize their own transactions without waiting for confirmation from other validators. With Lachesis, the Fantom network can verify and finalize transactions within 1-2 seconds.
References:
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